16 November 2020

Increasing the minimum wage would be a big mistake


Nowhere is the economic damage wrought by coronavirus more apparent than in the unemployment stats. Even with massive government support, the jobless rate is rising and now stands at 4.8%, an increase of 0.9 percentage points on a year ago. And we all know that worse is still to come. At some point soon, when furloughing ends and the other government support is withdrawn, the economy will have to adjust to the post-pandemic world, and reality will bite. When this happens many more people will lose their jobs.

If we are to emerge into a jobs-rich recovery, it’s absolutely crucial that the Government avoids burdening businesses with extra costs, particularly the price they pay to employ people. Yet that is exactly what is set to happen early next year when the Low Pay Commission makes its recommendations. Somewhat confusingly the UK has several different National Minimum Wages depending on age, but the main rate is the National Living Wage, which currently covers all workers aged 25 or older.

At the beginning of this year the Government gave the Commission a new target of raising the Living Wage to two-thirds of median earnings by 2024 and bringing the age qualification down from 25 to 21. Despite the pandemic this target remains in place, and although organisations like the IFS warned against raising the NLW back in March, the Government did exactly that and is set to do the same again.

A new report from the Centre for Policy Studies ‘The Case Against Raising the Minimum Wage’ shows that raising the NLW further could have a devastating impact on employment during the recovery. Such a move would significantly raise the cost for firms of employing people and hammer sectors like hospitality, which are both labour-intensive and have already borne the brunt of the economic damage from the pandemic.

Even before the pandemic, the Office for Budget Responsibility was forecasting that further increases in the minimum wage would lead to 50,000 extra unemployed. Our dire economic predicament turns up the heat considerably, and there’s a real risk that another hike could lead to hundreds of thousands of additional job losses.

Worse still, lowering the age at which the NLW applies from 25 to 21 will discourage firms from hiring younger, less experienced workers. It’s particularly galling as the young have taken the biggest financial hit from the pandemic because they are more likely to work in badly affected sectors.

The social care sector, which is extremely labour-intensive, was hit especially hard by the introduction of the NLW in 2016. With the system already struggling financially without a long-term funding settlement, several suppliers have gone out of business due to increased staff costs. The result has been an even more pressurised system and lower quality care. Further increases in the NLW will only exacerbate the parlous state the sector is already in.

That will also mean substantial costs for the taxpayer. Just keeping the sector from going on is likely to cost the Government around £500m. Add to that the direct cost of higher pay for public sector workers earning the NLW, which will likely require another £1.89bn of spending, and the total cost of raising the NLW comes to at least £2.4bn. That’s a substantial amount to find just at the moment when the Government will be under pressure to tighten its belt.

While the aim of raising wages for the lowest paid is commendable, the best way we can achieve this aim is to ensure a strong recovery and the creation of lots of new jobs so the scarring effects of unemployment are avoided.

And, as it happens, raising the minimum wage is not a particularly progressive measure anyway. As the IFS points out, “only 22% of minimum-wage workers today live in the lowest-income fifth of working households, and only 19% live in a household that is in relative poverty”. Some low income workers will also see some of the gains from a higher minimum wage clawed back through reduced entitlement to benefits such as universal credit.

So, far from being a measure that enhances prosperity, raising the NLW to two-thirds of median earnings by 2024 will damage the chances of a strong recovery and could lead to significantly higher unemployment. It will hit those sectors and those workers who have already suffered most economically from the pandemic. The government must abandon the target and not raise the NLW further, at least until the economy is in a state strong enough to absorb the damage this would do.

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Jethro Elsden is a Data Analyst at the Centre for Policy Studies